CalcKitHouse Rent Allowance (HRA) is the part of many Indian salaries meant to cover rent. Under Section 10(13A) of the Income-tax Act, a portion of it is exempt from tax — but the exemption is not a fixed percentage of your HRA, and it is not automatic. It is the smallest of three figures worked out from your basic salary, the rent you actually pay, and the city you live in. Get the formula right and you can see exactly how much of your HRA is tax-free and how much is added to your taxable salary.
The HRA exemption formula
Your exempt HRA is the least of these three amounts:
1. Actual HRA received from your employer during the year.
2. Rent paid minus 10% of salary (basic salary + dearness allowance).
3. 50% of salary in a metro city, or 40% of salary elsewhere.
Whichever of the three is smallest becomes your exemption. Everything above that amount is taxable HRA and is added back to your salary income. That is the whole calculation — the skill is in getting the three inputs right.
What "salary" means in the formula
For HRA purposes, "salary" means your basic pay plus dearness allowance — but only the part of DA that forms part of retirement benefits — plus commission fixed as a percentage of turnover, where that applies. It is not your CTC and not your gross pay. HRA itself, special allowance, bonus and employer PF contributions are all excluded. Using your CTC or gross salary is the most common mistake in HRA math: it inflates the 50%/40% cap and the 10% deduction, and produces an exemption that will not survive scrutiny.
Which cities count as metro?
Only four cities qualify as metros for the 50% rate: Delhi, Mumbai, Kolkata and Chennai. Everywhere else uses the 40% rate — including Bengaluru, Hyderabad, Pune, Ahmedabad, Gurgaon and Noida, no matter how large or expensive they are. What matters is the city where you live and pay rent, not where your office is located. Tax rules are revised from time to time, so check current rates and the current metro list before filing — newer rules have expanded the list for later tax years.
Worked example
Take an employee in Mumbai with a basic salary of ₹50,000 a month, no DA, HRA of ₹20,000 a month and rent of ₹18,000 a month. Worked annually: salary is ₹6,00,000, HRA received is ₹2,40,000 and rent paid is ₹2,16,000. Now the three limits: (1) actual HRA received = ₹2,40,000; (2) rent minus 10% of salary = ₹2,16,000 − ₹60,000 = ₹1,56,000; (3) 50% of salary (metro) = ₹3,00,000. The least is ₹1,56,000 exempt per year, so the taxable HRA is ₹2,40,000 − ₹1,56,000 = ₹84,000 a year (₹7,000 a month). Note that the rent leg binds here, not the 50% cap — that is true for most salaried employees. Try your own numbers in our free HRA Calculator — it runs the same three-limit formula instantly and tells you which limit is binding.
Old regime only
HRA exemption exists only under the old tax regime. The new regime (Section 115BAC) offers lower slab rates but disallows the exemption entirely — under it your full HRA is taxable, even if you pay rent. So before claiming anything, confirm which regime you have opted for. If you are on the new regime, the exemption is zero and there is nothing to calculate. Compare both regimes on your full salary before choosing, and check current slabs before filing.
Proof you need to claim it
You must actually pay rent for a home you live in — no rent, no exemption, so living in your own house gives zero HRA exemption. Keep rent receipts and a rental agreement. If your annual rent exceeds ₹1,00,000, you also need your landlord's PAN when claiming. Rent paid to a parent counts only if it is genuinely paid, backed by receipts, and the parent declares it as rental income. Keep the proof even if your employer never asks for it — the tax department can.
Common mistakes to avoid
Four errors show up again and again. Using CTC or gross pay instead of basic plus DA. Counting Bengaluru or Hyderabad as a metro city and applying the 50% rate. Claiming the exemption while on the new tax regime, where it does not exist. And claiming without rent receipts or a landlord PAN for high rent. One more subtle point: the calculation is done period-wise — if your salary, rent or city changes mid-year, each period is computed separately and then added together, rather than using one annual average.